Genius idea selling puts on SPX??

Discussion in 'Options' started by iloveksy, Sep 13, 2019.

  1. iloveksy


    OK. What do you guys think? 0 DTE (same day expiration) selling naked SPX puts on 5-6 delta. Portfolio margin.
    1. Let it expire if not threatened
    2. For protection, put an stop order on 2X of premium

    Worst case scenario, like flash crash, at least it will be stopped out (may not be 2X but it shouldn't blow up my account). About 95% of time I will win, and loss will be limited due to my stop loss set up. Same day trade so quick profit/loss realization. No???
  2. kv1289


    You will likely run into issues trying to get filled on the stop order.
    When the market really goes bad liquidity dries up and the bid/ask spread can get unexpectedly wide or non existent.
    You might be better off embedding some sort of a stop loss in your initial strategy, such as a long put further out of the money.
    Also consider the fact that the steady small gains you receive can be a false friend. When you take a full loss it will wipe out many months or sometimes even years of gains.
    jys78 likes this.
  3. iloveksy


    But SPX has crazy good liquidity. I heard it would still fill during flash crash, although it would be bad (but can't be so bad to blow up years of gain, right??)
  4. kv1289


    The flash crash was before my time but I've heard some more experienced traders talk about how order books completely vanish in even the most liquid products (Yes including ES, SPX, etc.). If there is no market in the underlying there is no way a market maker is going to give you a two sided market on a derivative.

    To my knowledge there are no professional traders or firms that use something like this as their primary trade. In fact most risk managers won't even allow it.

    As for the cost of stopping out we can look at the option chain to get an example.
    This trade nets you a cool $25, but if something really bad happens you will be out $1,975.

    Annotation 2019-09-13 215559.png

    At the end of the day its your money, do what you think is best. But there is no excuse for not understanding the risks before putting on a trade. Make sure you have accepted all possible outcomes however unlikely they may be.
    iloveksy likes this.
  5. I've got a friend who does 0-day ICs on $SPXW.X or SPY from 1 to 3 times a week, somewhere in that delta range; sets the initial stops at 1-1.5x the max profit. Gets stopped out 5-10% of the time, does pretty well otherwise (mostly lets them expire.) I've joined him in doing that several times. Not my favorite kind of trade, but a few hundred bucks can come in handy.

    Given the remote chance of another flash crash, times the fraction representing the narrow time slot that this trade is open, times the tiny chance of liquidity drying up on what is a really, really small move (center of IC to stop, at max) and starting from that exact price point and immediately crashing rather than something with a bit of run-up movement... I don't think it's realistic. A black swan is usually a single binary event - not a series with multiple dependencies.
  6. gaussian


    This has basically been my experience on any of these strategies.

    If you're right - great. If you need to get out - good luck. I've never been able to get a good fill deep OTM even with really, really solid open interest.
  7. TommyR


    is the delta the same thing as the chance the premium doubles at anypoint before expiry. if so i can't fault your maths you should win 95% of the time
  8. TommyR


    try to be as fully hedged as possible in the next flash crash please.
  9. iloveksy


    How would you hedge fully??
  10. taowave


    Its an awful awful idea on every levels.

    If you feel compelled to sell garbage,do a split strike fly or a 1 x2..At least you can make real money if you are lucky..

    Here's the real issue,and Im quoting William Eckhardt.

    "The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain".

    Selling garbage puts is a suckers bet,and Im pretty dam sure I have lost more money selling that shit than anybody on this site...

    #10     Sep 15, 2019
    FriskyCat likes this.